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Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms

  • Randall S. Kroszner
  • Philip E. Strahan
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    This paper provides a positive political economy analysis of the most important revision of the U.S. supervision and regulation system during the last two decades, the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA). We analyze the impact of private interest groups as well as political-institutional factors on the voting patterns on amendments related to FDICIA and its final passage to assess the empirical importance of different types of obstacles to welfare-enhancing reforms. Rivalry of interests within the industry (large versus small banks) and between industries (banks versus insurance) as well as measures of legislator ideology and partisanship play important roles and, hence, should be taken into account in order to implement successful change. A divide and conquer' strategy with respect to the private interests appears to be effective in bringing about legislative reform. The concluding section draws tentative lessons from the political economy approaches about how to increase the likelihood of welfare-enhancing regulatory change.

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    File URL: http://www.nber.org/papers/w7582.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7582.

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    Date of creation: Mar 2000
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    Publication status: published as Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms , Randall S. Kroszner, Philip E. Strahan. in Prudential Supervision: What Works and What Doesn't , Mishkin. 2001
    Handle: RePEc:nbr:nberwo:7582
    Note: ME
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    1. Alberto Alesina & Geoffrey Carliner, 1991. "Politics and Economics in the Eighties," NBER Books, National Bureau of Economic Research, Inc, number ales91-1, October.
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